For the past 50 years, the law with respect to out-of-state retailers on sales to in-state customers has been that it is unconstitutional to compel a retailer to collect and remit sales and use tax unless the retailer has a physical presence (e.g., an employee or building) in the state. On June 21, 2018, the Supreme Court issued its ruling in South Dakota v. Wayfair, Inc. overturning Quill Corp. v. North Dakota and thus eliminating this physical presence requirement. As a result, states may now require out-of-state retailers to collect and remit sales and use tax on sales to in-state consumers regardless of the retailer’s physical presence, provided that the retailer has “substantial nexus” with the state.
In Wayfair, the Supreme Court examined a South Dakota law requiring out-of-state retailers with at least $100,000 in sales or 200 transactions per year in the state to collect sales taxes even if they have no physical presence there. The Court noted that a tax will be sustained so long as it: (1) applies to an activity with a substantial nexus with the taxing state, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services the state provides. The “substantial nexus” requirement is met where a retailer purposely “avail[s] itself of the substantial privilege of carrying on business” in the state. The Court found that its prior precedents erroneously construed this requirement through the imposition of an additional physical presence requirement.
With respect to the South Dakota law, the Court found that the connection of a retailer that does $100,000 or 200 transactions in the state “is clearly sufficient based on both the economic and virtual contacts…with the state” to establish “substantial nexus.” The Court also highlighted several factors supporting the validity of the law, including: (1) a safe harbor for businesses who transact only limited business in South Dakota by virtue of the $100,000 or 200 transactions threshold, (2) a prohibition on retroactive application, and (3) participation in the Streamlined Sales and Use Tax Agreement (SSUTA), which creates uniformity in order to reduce tax compliance costs.
As a result of the Court’s decision, physical presence is no longer required for states to collect sales and use tax on an out-of-state retailer. Therefore, an out-of-state retailer will now need to consider whether it has established a “substantial nexus” with each state by “availing itself of the substantial privilege of carrying on business in that jurisdiction.” While we expect most states will choose to adopt the South Dakota law, some (like Minnesota) may choose to adopt a more aggressive variation (by lowering the monetary or transactional thresholds). Whether such differences can withstand challenge under the “substantial nexus” standard is an open question.
Minnesota’s Nexus Law
As noted in our prior alert, the Minnesota Legislature in 2017 enacted a law that would impose sales tax on certain e-commerce companies if Quill was overturned. This law (“Minnesota’s Nexus Law”) (Minn. Stat. 297A.66) requires out-of-state retailers to collect sales tax on sales made through a “Marketplace Provider.” A Marketplace Provider is defined as any person who maintains a place of business in the state and “facilitates a retail sale” by listing or advertising goods or services for sale by the retailer, or by collecting payment from the customer and transmitting that payment to the retailer. There is a safe harbor for retailers whose only sales into Minnesota are through a Marketplace Provider and total less than $10,000 over the previous twelve months. Minnesota’s Nexus Law also imposes sales tax on a retailer if it has “affiliates” in Minnesota. An affiliate includes a company that uses the same trademarks as the retailer, or a location at which customers can pick up the goods sold by the retailer.
While Minnesota’s Nexus Law bears some resemblance to South Dakota’s law (e.g., a safe harbor for small retailers), it is also considerably more aggressive since the threshold level of sales triggering the obligation to collect tax is considerably lower at only $10,000 in annual sales, instead of $100,000 in sales or 200 transactions per year.
Immediately following the publication of Wayfair, the Minnesota Department of Revenue announced that within 30 days, it will publish guidance on sales tax nexus after Wayfair for those not currently collecting and remitting sales tax. In particular, it noted that it is analyzing the impact of Wayfair on: (1) online retailers, (2) out-of-state retailers, and (3) Marketplace Providers.
For more information, please contact James E. Duffy at (612) 977-8626, Andy Carlson at (612) 977-8242 or Dimitrios C. Lalos at (612) 977-8830.